MANAGERIAL OWNERSHIP OF VOTING RIGHTS A Study of Public ...

Journal of Financial Economics 14 (1985) 33-69. North-Holland

MANAGERIAL OWNERSHIP OF VOTING RIGHTS A Study of Public Corporations with Dual Classes of Common Stock*

Harry DeANGELO and Linda DeANGELO

Universrty of Rocheszer, Rochester, NY I462 7, USA

Received June 1983, final version received September 1984

Managers of firms with dual classes of common stock can choose different quantities of votes for a given cash flow interest by choosing different quantities of the two securities. We study managerial stock holdings in 45 dual class firms and find that vote ownership per se is an important motivation for these holdings in that corporate officers and their families hold a median 56.9% of the votes and 24.0% of the common stock cash flows. We also find significant family involvement in many sample firms, and document four case studies in which explicit acquisition premiums were paid for superior votmg shares.

1. Introduction

Why do managers of public corporations hold common stock in their own firm? One possible motivation is that managers hold common stock for its residual cash flow rights, perhaps because such ownership gives managers increased incentives to maximize company value. Another, possibly comple- mentary, motivation is that managers hold common stock for its underlying voting rights, e.g., to increase their influence on the board of directors and hence on the firm’s general policies. In short, managers may hold common stock for the cash flow rights it confers, for the associated voting rights, or for some combination thereof. Since the typical firm has one class of common stock which provides cash flow and voting rights in equal proportion, it is difficult to assess whether a desire to own votes per se is an important motivation for managerial common stock holdings. In contrast, one can assess this issue for companies with dual classes of common stock which differ only in their voting rights, since managers of these firms can choose different quantities of votes (for a given quantity of cash flows) simply by choosing different quantities of the two securities.

*Research support for this study was provided by the Managerial Economics Research Center of the University of Rochester. Useful comments were received from Yoram Barrel, Larry Dann, Frank Easterbrook, David Gordon, David Hirshleifer, Dave Larcker, Richard Leftwich, Wayne Mikkelson, Eric Noreen, Jim Patell, Ed Rice, Cliff Smith, Jerry Warner, Ross Watts, Jerry Zimmerman, Dan Fischel (the referee), and participants in the Stanford Summer Accounting Research Seminar and the Cornell Finance Workshop. We are grateful to Mike Jensen for especially helpful comments.

0304-405X/SS/S3.3001985, Elsevier Science Publishers B.V. (North-Holland)

34 H. DeAngelo and L. DeAngelo, Managerial ownership of voting rights

In this paper, we study managerial common stock holdings in 45 publicly held firms with dual classes of common stock which carry identical cash flow, but different per share voting rights. The sample firms are of interest not only for their ownership structures, but are also notable for their production of familiar and successful products such as Coors beer, Cross pens, Jack Daniels whiskey, Ford automobiles, Nike running shoes, Noxzema face cream, and the New York Times and Washington Post newspapers. Briefly summarized, the data reveal that, in almost every sample firm, management’s common stock holdings are tilted toward the security with the superior voting rights and, in well over half of the sample firms, majority control is held by corporate officers and their families. In the typical sample firm, managers hold a minority interest in common stock cash flows, yet they own a majority of the voting rights. In many dual class firms, we observe substantial family involvement in that two or more related parties currently hold top management positions and family members have sometimes held such positions for several generations. Finally, we document case studies of four negotiated acquisitions in which controlling stockholders of dual class firms received explicit premiums for their superior voting shares.

The evidence for dual class firms suggests that, for some publicly traded companies, managerial vote ownership is an important element of the corporate ownership structure. We therefore discuss in section 2 some possible determinants of such ownership in corporations with either dual or single classes of common stock. Sections 3 and 4 of the paper contain sample selection procedures, descriptive statistics, and the empirical analysis of the management ownership data for our 45 dual class firms. (The ownership data are also reported on a firm-by-firm basis in the appendix.) Section 5 discusses some issues raised by the managerial ownership evidence reported in section 4. Section 6 provides details on the compensation paid to controlling and non-controlling stockholders in the four selected acquisitions of dual class firms. Section 7 briefly summarizes our findings.

2. Managerial ownership of voting rights

Managers of a public corporation presumably own shares in that corporation for the underlying ownership rights they confer, i.e., for residual cash flow and/or voting rights. The managerial incentive effects associated with residual cash flow ownership have been previously discussed by Alchian and Demsetz (1972) and Jensen and Meckling (1976), among others. Jensen and Meckling, for example, analyze the determinants of management’s cash flow holdings under the assumption that the voting rights allocation is parametric and, moreover, that all votes are held by incumbent managers. As they (section 6.2) point out, in a more general framework managerial vote ownership would be endogenously determined together with other aspects of the firm’s ownership

H. DeAngclo und L. DeAngelo, Munugerral ownership o/voting rrght.s 35

structure. While complete development of such a theoretical framework is

beyond the scope of this paper, we can provide background for our empirical analysis by discussing some possible determinants of the degree of managerial vote ownership in public corporations.

One factor that encourages managers to hold votes is the costs incurred because information about managerial performance and/or investment opportunities is difficult to communicate to outsiders. Along these lines, Alchian and Demsetz (1972, fn. 14) argue that insider-managers hold voting rights to deter relatively uninformed outside stockholders from mistakenly replacing the incumbent management team with a less productive group. Managerial vote

ownership not only lessens the chance of such mistakes, but also enables managers to expend fewer resources in attempts to explain their decisions to

potential proxy fight organizers and to outside stockholders who vote in such contests. Vote ownership also reduces managers’ incentives to protect themselves against the actions of less informed outside stockholders by taking investment projects which, although less profitable than other opportunities, have payoffs that are more easily observed by outsiders. Similarly, vote ownership provides managers with greater inEuence over the (current and future) composition of the board of directors and thus reduces the likelihood that difficult-to-evaluate proposals will be resisted or vetoed by relatively uninformed outside directors.

Managers may also hold votes to more firmly define their property rights to returns on their investments in organization-specific human capital. The benefit from managerial vote ownership is in this case substantially identical to that revealed by the standard economic analysis of the patent problem. Because the returns to innovation are potentially appropriable through future competition,

the patent analysis indicates that reduced exposure to such competition yields benefits by encouraging investment in innovation. In a public corporation. vote ownership can shield incumbent managers from competition effected through vote accumulation by other management teams. Vote ownership can thus encourage managers to invest in organization-specific capital whose returns are potentially appropriable if outside stockholders can transfer control to another management group. [For a general discussion of the effects of appropriability on incentives to invest in specific capital, see Klein, Crawford, and Alchian (1978) and Williamson (1975) and for an analysis of these issues in a corporate control context, see Easterbrook and Fischel (1982).]

Since the managerial compensation package can include appropriable non- pecuniary benefits, managers may hold voting rights to more firmly define their property rights to on-the-job consumption. Such managerial perquisites can take many forms, all of which share the common element that they be consumption goods that can be purchased outside the firm only at relatively unattractive terms. For example, managers may hold voting rights because they are willing to pay (through a lower price at which they can sell shares) for the


personal consumption associated with greater discretion in allocating company resources. Our empirical analysis reveals family involvement in many sample firms, which raises the possibility that managerial perquisites may take the form of granting employment to relatives at higher wages than would be paid absent the personal relationship (or of transferring control to heirs). When job-specific perquisites represent an important element of managers’ compensation package, managerial vote ownership can be used to deter outside stockholders from opportunistically selling the rights to such perquisites by transferring control to another management group.

When managerial returns (pecuniary or otherwise) are potentially appropriable through a control transfer, all parties can benefit ex-ante from contractual arrangements that provide managers with greater ability to negotiate the terms of any such transfer and/or that provide some compensation for the managerial losses they engender ex-post. These arrangements include managerial ownership of votes in board elections, as well as antitakeover charter provisions which make it more difficult to transfer corporate control without the approval of incumbent management. Golden parachute contracts and other severance

agreements reduce managers’ personal losses should corporate control be transferred to another management team. Like managerial vote ownership and antitakeover provisions, these and other long-term employment agreements can benefit both managers and outside stockholders by encouraging incumbent managers to invest in organization-specific human capital.

Managerial vote ownership and these other arrangements involve costs to the extent that they reduce the degree to which incumbent managers are disciplined by competition from other management groups. For example, golden parachute arrangements reduce managerial losses in the event of an unnegotiated control transfer and therefore reduce the effectiveness of hostile takeover as a mechanism which punishes managers for inefficient or opportun- istic behavior. Similarly, the greater the voting interest held by incumbent managers, the less likely they are to bear personal costs of poor performance via job displacement and/or by wage reductions effected through a proxy fight or hostile tender offer. Votes held by incumbents act as a deterrent to investment by potential competitors in both search activities to discover opportunities for improved management, and efforts to accumulate sufficient votes to oust incumbent managers, should such opportunities be discovered. Managerial vote ownership also makes it less likely that the firm’s current board of directors will punish incumbents for poor performance, e.g., through wage reductions or dismissal.

While managerial vote ownership, antitakeover provisions, and golden parachutes all reduce the threat of hostile takeover, it does not follow that managerial decisions go undisciplined in those public corporations that have such arrangements. Rather, even when incumbent managers hold a majority voting interest and thus can block an unnegotiated takeover, they nevertheless

H. DeAngelo und L. DeAngelo, Munogerwl ownership of voting rights 31

have incentives to introduce other (also imperfect) disciplinary mechanisms

which serve as substitutes for competition from other managers. A well-functioning capital market enforces these incentives by incorporating the expected consequences of managerial discretion into the supply price of external capital. For example, if the firm’s ownership structure gives managers substantial latitude to make self-interested decisions which damage outside stockholders, the price at which investors subscribe for shares will be correspondingly low. Conversely, managers can raise capital at more attractive terms if alternative disciplinary mechanisms align their interests more closely with those of outside

stockholders. A variety of explicit and implicit contracts can serve as substitute disci-

plinary mechanisms for the threat of hostile takeover. All such mechanisms share the common element that they link ex-post managerial rewards to the welfare of outside stockholders. For example, as Jensen and Meckling (1976) emphasize, ownership of an interest in the firm’s common stock cash flow stream constrains managerial behavior by forcing managers to bear ex-post wealth consequences of their decisions which parallel the consequences for outside stockholders. Greater managerial vote ownership (with its attendant

reduction in monitoring through external competition) should therefore induce managers to hold a larger cash flow interest than they would optimally hold if they owned fewer (or zero) votes. Along these lines, Easterbrook and Fischel (1983) hypothesize that voting and residual cash flow rights tend to be owned by the same party to provide that party with incentives to exercise voting rights in ways that increase company value.

In most public corporations, shares of common stock reflect this comple- mentary relationship by providing nominal voting and cash flow rights in a one-to-one ratio. The matching is not one-to-one in real terms, however, because the effective voting rights of a given share depend on the distribution of votes across individuals.’ For example, under majority voting rules, 50.1% stock ownership enables the majority holder to elect all board members - i.e., effectively gives him 100% of the votes in board elections with only a 50.1%

interest in common stock cash flows.’ Similarly, under cumulative voting rules, 50.1% vote ownership guarantees election of a majority of the board, and hence the ability to determine the outcome of those policy questions that are settled by majority board vote. For another example, the effective voting

‘The effective cash flow rights of a given share can also differ from its nominal rights because the courts do not strictly enforce the right to share proportionately in cash distributions. For example, under the business judgment rule, a firm can repurchase stock from a large block stockholder at a premium which is not offered to other stockholders.

‘A majority voting interest is not sufficient, of course, to determine all corporate decisions. For example, when the corporate charter requires a supermajority of 80% to approve a merger, ownership of 20.1% can block the transaction regardless of the votes cast by other stockholders. The legal system also alters stockholders’ effective voting rights, e.g., by encouraging insiders to waive their voting rights in potential conflict-of-interest transactions.

38 H. DeAngelo and L. DeAngelo, Manogeriul ownershp oj voting rights

interest of a substantial minority stockholder exceeds his cash flow interest to the extent that small stockholders choose not to vote because they assess a trivial probability that their vote will affect the election outcome. The general point is that the distribution of share ownership itself effectively allocates

greater (fewer) voting than cash flow rights to different stockholders.

Contractual arrangements at both the corporate and personal level can also allocate different voting and cash flow percentages to different individuals. For example, phantom and junior stock plans provide some managers with an equity-like claim without a matching vote interest. Dual classes of common stock with different per share voting rights give managers (and other investors) the opportunity to hold greater or fewer votes for a given cash flow interest. Voting trust arrangements allow some investors to vote shares in which others retain the cash flow rights, as do those standstill agreements in which large block stockholders agree to vote with management for some period of time. Interlocking ownership through a holding company or through a more elaborate

stock pyramid can also enable a given investor to own different quantities of voting and cash flow rights. For instance, 50.1% ownership of a parent holding company which, in turn, owns 50.1% of an operating subsidiary guarantees majority representation on the subsidiary’s board with only a 25.1% interest in its common stock cash flows.

The dual class ownership structures we study here can thus be viewed as one form of a general set of contractual arrangements which allow investors to hold different combinations of voting and common stock cash flow rights. For our purposes, the principal advantage of dual class structures is that they enable relatively easy empirical separation of a given managerial common stock holding into its voting rights and cash flow components, and therefore enable us to assess the importance of managerial vote ownership in these firms. However, since our sample firms have taken the trouble to explicitly assign different voting rights to different shares, they are probably among the set of companies for which the allocation of voting rights is an especially important economic issue. For this reason, our evidence is likely to overstate the overall importance of vote ownership (by managers or other parties) in randomly selected public corporations. On the other hand, the fact that voting and cash flow rights are separated by explicit contract in dual class firms does not imply a priori that the party to whom voting rights are most valuable will be corporate management. Nonetheless, given our dual class sampling criterion, the importance of managerial vote ownership in other public corporations is an open empirical issue which our evidence cannot resolve.

3. Sample selection and descriptive statistics

Companies with dual classes of common stock outstanding in 1980 were initially identified by inspection of the following source documents: Standard

H. De-Angelo und L. DeAngelo. Munugenul ownership o/cwtlng nghrs 39

and Poor ‘s Security Owners ’ Stock Guide, The Bond and Quotation Record, the

American Stock Exchange (AMEX) and Over-the-Counter (OTC) editions of the ISL Daily Stock Price Guide, a randomly selected Wall Street Journal

listing of AMEX and OTC securities, and the sample of firms compiled by Lease, McConnell, and Mikkelson (1983). A company was included in the sample if any source document’s report on the firm either (i) specified entries for two separate classes of publicly traded common stock or (ii) indicated the existence of one class of publicly traded common stock with an associated class designation (e.g., Coors Co. B). This sampling procedure will exclude dual class firms in which only one class is publicly traded and that security is simply labelled ‘common stock’ with no class designation, e.g., as is the case with Ford Motor Company. We included Ford in our sample because it is a widely cited example of a firm with dual classes of common stock. Nevertheless, it should be recognized that our sampling procedure is likely to overlook other, less well known, firms with similar equity ownership structures.

The sample was initially narrowed to 78 firms with dual classes of common stock which, according to Moody’s Manuals, satisfied the following criteria:

1. the classes differ with respect to voting rights (in board of director elections) relative to cash flow rights (dividends and cash proceeds upon liquidation/merger),

2. the class of common stock with the inferior voting rights is not convertible at the holder’s cption into the class with the superior voting rights (although the opposite condition is allowed),3

3. neither class of common stock is callable, authorized but unissued, or labelled ‘preferred’, and

4. the firm is incorporated in the United States.

We further narrowed the sample to 45 firms satisfying criteria 1-4 whose corporate charters provide for two classes of common stock with identical per share cash flow rights but different voting privileges.4 For these 45 firms, each firm’s charter requires a strictly proportionate relationship between the cash disbursements to the two classes of common stock; e.g., on a per share basis, cash dividends paid to class A stock must be identical to those paid to class B stock. Each firm’s charter also specifies different voting rights across classes at

3This criterion is imposed in order to eliminate those firms for which the IWO classes are interconvertible, and thus for which the labels superior and inferior voting stock may represent a ‘distinction without a difference’.

4For one firm included in our sample, class A stock is entitled to identical per share voting rights but (exactly) 20 times the dividend and liquidation payment to class B stock. We treated class B as the superior voting stock since, for equal cash flow rights, it has 20 times the voting rights of class A stock. For example, a twenty-for-one split of the class A stock would yield one new share with cash flow rights equal to those of one class B share and one-twentieth of a vote.

40 H. DeAngelo and L. DeAngelo, Managerial ownership OJ voting rights

least in board of director elections and perhaps also in other matters such as proposed merger transactions. For each company, we verified stockholders’ cash flow and voting rights by inspection of the articles of corporation or relevant portions thereof which were supplied by the firm or obtained from a government agency in the firm’s state of incorporation.5

The sample contains 21 firms for which the stock with the inferior voting rights has no vote in board elections. We call this the uoting-non-uoting

ownership structure subsample. While holders of non-voting stock have no voice in board elections, they may be entitled to vote on certain major corporate decisions (such as mergers) under applicable state law as modified by the company’s articles of incorporation. The cluss voting structure subsample contains the fifteen sample firms that hold two separate board elections, and in which the superior voting class elects a majority of directors. Finally, the pooled voting structure subsample contains the nine cases in which the two classes vote together in one board election, and the stock of the superior voting class has a greater number of votes per share than the other class.

For all sample firms, at least one of the two classes is publicly traded, typically on the American Stock Exchange or Over-the-Counter, with a substantial public stock interest. For example, the median firm in the full sample has a total of 2,500 stockholders. Fifteen of the 45 firms report that both classes of common stock are publicly traded. The median firm in this subsample has a total of 3,552 stockholders. The remaining 30 firms report one class of publicly traded stock and the median firm in this subsample has a total of 2,217 stockholders. In all 30 cases, the publicly traded stock is the class with inferior voting rights in board elections.

Descriptive statistics for the 45 dual class firms appear in table 1. In panel A of the table, the sample is partitioned by type of voting arrangement and in panel B, it is partitioned according to whether public trading markets exist for one or both classes. Columns (2) and (3) of the table reveal that the typical firm is reasonably large, with a median book value of total assets of $205.1 million and a median market value of all common shares of $88.6 million. The mean size measures are substantially above the medians for the full sample (and for the pooled voting and one-traded-class subsamples) due to the inclusion of Ford Motor Company. Ford notwithstanding, the other sample firms still represent public corporations of considerable size. For example, based on total assets, the median firm in the full sample would place 486th in the 1983 Fortune 500 ranking of U.S. industrial corporations which employs

1982 data [see Fortune (May 2, 1983)]. Column (4) of table 1 reveals that the typical sample firm is conservatively

leveraged. For the full sample of 45 firms, the mean ratio of long term debt to

‘Most articles of incorporation clearly specify the cash flow rights of each class of stock. In a few cases, the articles’ phrasing could be interpreted in more than one way and inclusion in the sample was based on our judgment of the most reasonable interpretation.

H. DeAngelo and L DeAngelo, Managerral ownershtp o/voting rights 41

total assets is 0.141 (median 0.102). Conservative leverage characterizes the average firm in all sample partitions, and is especially notable in the voting-non-voting subsample where the typical company employs almost no long-term debt (0.029 median debt-to-assets ratio). [As an aside, Jensen and Meckling (1976, fn. 52) argue that managers may employ lower leverage to mitigate the possibility that financial distress will enable debtholders to obtain control of the firm.] The last column in the table presents the ratio of the reported number of stockholders of the inferior voting stock to the total

reported number of stockholders of both classes. For the median firm in the full sample, approximately 96% of all stockholders own shares of the inferior voting class. This observation suggests that dual class firms tend to exhibit concentrated ownership of voting rights.

Table 1

Company size and other descriptive statistics for 45 firms with dual classes of common stock.=

Number Total assets of firms (in $CWs)

Mean Total (median)

(1) (2)

Total market value of both

classes of common stock

(in $000’s)

Mean (median)

(3)

A. Partitioned by type of votrng arrangement

1. Voting- 21 230,700 non-voting (112,915)

2. Pooled 9 2,784,215 voting (283,121)

3. Class 15 300.668 voting (230,289)

B. Partitioned by trading status

1. Both classes 15 275,789 publicly traded (277,219)

2. One class 30 1,009,193 publicly traded (152,406)

C. Full sample 45 764,725 (205,096)

127,734 (69,804)

457,186 (159,654)

161,245 (102,131)

181,949 (102,131)

216,218 (88,035)

204.795 (88,639)

Number of inferior voting

Long-term stockholders as debt/total a fraction of

assets total stockholdersC

Mean Mean (median) (median)

(4) (5) -

0.070 0.813 (0.029) (0.862)

0.177 0.840 (0.120) (0.942)

0.218 0.878 (0.161) (0.981)

0.220 0.657 (0.166) (0.645)

0.101 0.947 (0.096) (0.985)

0.141 0.840 (0.102) (0.958)

‘Depending on availability at the time of sample compilation, these figures are derived from 1980 or 1981 data obtained from company annual reports, 10-K’s, or Mooc$‘s Manuals.

bThe total market value of equity is calculated from (i) the number of shares outstanding at year end and (ii) the average of the high and low trading prices for the year for publicly traded issues as reported by the firm or Moody’s, Shares that are not publicly traded are also valued at this open market price. (But see the caveats about open market share valuation in section 6.)

‘The numbers in column (5) are based on the subsample of 38 firms that reported the number of stockholders separately for each class (18 voting-non-voting, 7 pooled, 13 class; 14 both classes publicly traded, 24 one class publicly traded).

42 H. DeAngelo and L. DeAngelo, Managerial ownership o/voting rights

To address the voting rights ownership issue directly, we obtained stock ownership data for each of the 45 sample firms from recent proxy statements or form lo-K’s6 These source documents report equity ownership data in three general forms: (i) on an individual-by-individual basis for each 5% + holder, regardless of contractual relationship with the firm, (ii) on an individual-by-individual basis for each member of the board of directors, and (iii) on a summary total basis for all individuals who are officers and/or directors of the firm. Unfortunately, the proxy or 10-K disclosure of these ownership data frequently allocates the same vote to more than one individual,’ and the treatment of a given ownership position is not uniform across firms. Thus, to ensure homogeneity across observations and to avoid double-counting, we constructed management voting rights ownership from the-individual level data reported in the text and footnote disclosures of the relevant proxy statements or lo-KS.

The algorithm we employed to calculate managerial ownership assumes that the relevant management coalition consists of corporate officers and their families. (As we discuss in section 4, one obtains the same qualitative picture of managers’ voting rights under more narrow and more broad definitions of the relevant management group.) Our specific measure includes only the holdings of corporate officers and not those of non-officer (outside) directors. We also treat as management-owned those shares held by relatives of corporate officers and we allocate joint (trust) holdings to officers if they or their families constitute a majority of the voting trustees.

To determine whether a given individual was an officer of the firm, we initially examined the biographical information contained in the proxy statement and/or form 10-K. The individual’s classification was checked against

‘The source documents are approximately evenly split between 1981 and 1982. This calendar year split occurred because we requested the latest available documents and availability depended on the firm’s particular fiscal year convention and annual meeting date. In three cases, we employed source documents carrying 1980 dates (two 10-K’s dated December and one proxy dated March). For the ownership data reported in tables 2-4 below and in the appendix, proxy statements and form 10-K’s were the source documents in 37 and 8 cases, respectively.

‘As an illustration of the complexity encountered in the reported ownership statistics, consider the following excerpt from the proxy statement of The Washington Post Company (March 31, 1980; p, 7): ‘A substantial number of shares of the Company’s Class A and Class B Stock is held in trusts or subject to other agreements which provide for the sharing of investment power, voting power or both among several persons, each of whom is deemed by the Securities and Exchange Commission to be a ‘beneficial owner’ of the shares so held. Furthermore, in many cases such persons do not include the beneficiary of the trust who, although not deemed to be a ‘beneficial owner’ in the absence of voting or investment power over the shares, is nevertheless shown below as a beneficial owner because of the beneficiary’s economic interest in the shares. In addition, since all the shares of Class A Stock are convertible at the option of the holder into Class B Stock on a share-for-share basis, each ‘beneficial owner’ of shares of Class A Stock is deemed by the Securities and Exchange Commission to be a ‘beneficial owner’ of the same number of shares of Class B Stock; in indicating below a person’s ‘beneficial ownership’ of shares of Class B Stock it has been assumed that such person has converted into Class B Stock all shares of Class A Stock of which such person is a ‘beneficial owner’. For these reasons there are very substantial duplications in the numbers of shares and percentages shown in each of the tables.’

H. DeAngelo and L. DeAngelo, Managerial ownership of oorrng rrghrs 43

that in Dun and Bradstreet’s Reference Book of Corporate Management and Moody’s Manuals. If a director held principal employment elsewhere, his holdings were excluded from those of the officer group. The Chairman of the Board was categorized as a non-officer if the source documents indicated a principal occupation elsewhere or did not list him among the five highest paid executives of the firm. Otherwise, such an individual was classified as a corporate officer and his holdings were included in our management ownership statistics.

Family relationships were identified from proxy statements and/or form IO-K’s and from Who’s Who in Finance and Industry. Absent evidence to the

contrary (see the entry for Tasty Baking Company in the appendix), we counted all family holdings as a group. The holdings of the entire family group were allocated to officers if family members currently held senior management

positions with the firm (defined as corporate officers of the rank of vice president and above). When no family member was currently a senior officer of the firm, we classified the entire family holdings as non-officer, even in those cases where family members held a number of seats on the board of directors. Substantial family involvement characterizes many of our sample firms and we

explore this subject further in sections 4 and 5 below. When voting and cash flow rights were divided by explicit contract, we

calculated managerial ownership solely on the basis of voting rights. For example, jointly owned shares (i.e., shares consolidated into a voting block through a trust or holding company) were allocated to individuals based on the arrangement for voting the shares bound together by explicit contract. Thus, the entire voting power of a voting trust was allocated to corporate officers if they or related parties constitute a majority of the trustees. If not, none of the voting power of the trust was allocated to officers. (For example, if two outside directors and an officer were reported in the proxy as trustees, then the entire trust holding was excluded from the management ownership statistics.) Sym- metrically, in the case where an officer-controlled outside corporation holds voting stock in the firm, the entire voting block was included in the management ownership statistics.

Calculation of managerial stock ownership positions obviously required judgment. To provide the reader with some assurance that our judgment has resulted in a reasonable picture of managerial ownership in these dual class firms, we provide two supplementary assessments of the allocation of voting rights. First, in the sample average discussion below, we report the proxy statement or 10-K’s stated total ownership figures for all officers and directors as a group [type (iii) data mentioned above]. Second, for each sample firm. the appendix documents (1) the management ownership statistics we constructed from the individual ownership data, (2) the proxy or 10-K stated figure for ownership by officers and directors, and (3) a capsulized (qualitative) description of important features of the observed voting rights allocation.


4. Managerial ownership in dual class firms: The evidence

This section describes the pattern of managerial common stock holdings in dual class firms from a variety of perspectives. The overall picture that emerges is that managerial vote ownership is an important element of the corporate ownership structure in these firms. Section 5 discusses some issues raised by this evidence.

4.1. Managerial ownership of superior and inferior voting stock

Table 2 documents stock ownership by managers of dual class firms under our assumption that the relevant management coalition consists of corporate officers and their families. The table reports the mean and median managerial stock ownership percentages for each class of security for the entire sample, as well as those for the various sample partitions [columns (3) and (4)]. Column (5) contains the mean (median) percentage of the total voting rights held by management. This latter figure represents the management group’s percentage of voting stock in the voting-non-voting subsample, the combined voting rights of both classes held by management in the pooled voting subsample, and the percentage of the superior voting stock held by the management group in the class voting subsample. For comparison purposes, the table contains average ownership percentages for all officers and directors as reported in the proxy statement or form 10-K [columns (1) and (2)].

Table 2 reveals that, on average, managers of dual class firms hold a substantially greater percentage of the security with the superior voting rights than of the security with the inferior voting rights. For the full sample of 45 firms, managers’ median holdings constitute 58.7% of the superior voting stock and 13.4% of the inferior voting stock. A substantial portfolio tilt toward the superior voting stock also characterizes average managerial holdings for all sample partitions [compare columns (3) and (4)]. For the full sample and for all partitions except pooled voting, the portfolio tilt is sufficiently strong to give management of the median firm enough votes to elect the entire board of directors or a majority thereof, depending on the voting rules for board e1ections.**9

‘In the class voting subsample, it is possible that management could own a majority of the superior voting stock and yet be unable to elect a majority of the board due to a cumulative voting provision. For these firms, we checked proxy statements, charter/bylaws, and relevant state laws to determine whether cumulative voting would alter a firm’s classification from majority controlled by officers to not majority controlled or vice-versa. In no case would cumulative voting change this classification.

‘Three sample firms also have a class of voting preferred stock outstanding. Two of these firms have class voting arrangements in which the preferred stockholders vote with the class that elects a minority of the board, and therefore the preferred stock does not affect our calculation of total officer voting power. The third firm has a pooled voting structure, and thus the preferred stock is included in the calculation of total officer voting power, but with a trivial impact (0.2% of the total voting power).

H. DeAngelo and L. DeAngelo, Managenal ownershrp o/vomg rights

Table 2

45

Percentage of voting rights controlled by management in 45 firms with dual classes of common stock.

Percentage controlled by officers and directors’ Percentage controlled by officersa

Superior voting rights stock

(1)

A. Partitioned by type o/voting arrangementC

1. Voting-non-voting (21 firms) Mean (Median)

57.4% 25.3% (61.2%) (16.0%)

2. Pooled voting (9 firms) Mean (Median)

3. Class voting (15 firms) Mean (Median)

B. Partitroned by tradmg status

1. Both classes publicly traded (15 firms) Mean (Median)

2. One class publicly traded (30 firms) Mean (Median)

C. Full sample (45 firmr)

Mean (Median)

43.1 (35.8)

51.9 (58.9)

49.1 (47.2)

57.5 (60.1)

54.7 (56.4)

Inferior voting rights stock

Superior Inferior voting voting rights rights stock stock

(3) (4)

8.9 (8.0)

21.5 (18.7)

28.6 (18.8)

16.8 (13.8)

20.7 (13.9)

56.3% 25.0% (60.2%) (15.9%)

61.4 12.4 (57.6) (7.5)

61.9 19.9 (67.3) (18.0)

54.7 31.5 (53.0) (31.2)

61.4 15.4 (71.3) (13.0)

59.2 20.8 (58.7) (13.4)

Total voting rights

in board electionsb

(5)

56.3% (60.2%)

39.6 (38.8)

61.9

(67 3)

53.6 (53.0)

55.5 (58.6)

54.8 (56.9)

“Columns (1) and (2) document ownership by all officers and directors as reported by the firm to the Securities and Exchange Commission in a proxy statement or 10-K. Columns (3)-(5) report ownership by officers and their families calculated according to the algorithm described in section 3. The ownership source documents are approximately evenly split between 1981 and 1982. See footnote 6 for details.

bFor firms with class voting structures, this figure represents management’s ownership of the security with the right to elect a majority of the board of directors.

‘A voting-non-voting arrangement gives all of the voting rights in board elections to the superior voting stock. A pooled voting structure gives a greater number of votes per share to the superior voting stock. A class voting arrangement stipulates two separate elections with the superior voting stock entitled to elect a majority of the board.

4.2. Managerial ownership of voting and common stock cash flow rights

The ownership figures reported in table 2 compare managers’ holdings of the superior voting class to their holdings of the inferior voting class. Another perspective on managerial ownership in dual class firms can be obtained by comparing managers’ share of common stock cash flow rights with their percentage interest in voting rights. To effect this comparison, we calculated

46 11. DeAngelo und L. De-Angelo, Munogeriul ownership of rroting rrghrs

managers’ implied common stock cash flow interest as the weighted average of their percentage holdings in the superior and inferior voting classes. Since all shares issued by a given sample firm carry identical cash flow rights, the percentage holding in each class is properly weighted by the ratio of the number of outstanding shares of that class to the total number of outstanding shares of both classes. The resulting cash flow measure will tend to overstate managers’ percentage interest in total common stock cash flows because we calculated managerial ownership percentages based on voting rights, and because voting and cash flow rights are often separated through devices such as voting trusts.

Table 3 reports managers’ average implied interest in common stock cash flows [column (4)] and compares this figure to their holdings of voting rights

[column (3)]. The table also contains the average fraction of total common stock cash flows to which the entire superior voting class is entitled [column

(2)]. For the typical firm in the full sample and in all sample partitions, the superior voting class is entitled to a substantially smaller share of total common stock cash flows than is the inferior voting class. For example, in the full sample, the class entitled to elect at least a majority of the board owns a median 17.0% share of total common stock cash flows.

A comparison of the data in columns (3) and (4) of table 3 indicates that managerial ownership of voting rights exceeds that of cash flow rights for the typical dual class firm in our sample. Specifically, for the full sample, the median voting rights percentage held by managers exceeds their median implied cash flow interest by 32.9% (56.9% votes versus 24.0% cash flows). A comparison of average voting and cash flow rights within each sample partition also indicates that managers hold a substantially greater fraction of votes than they do of common stock cash flows. The difference in medians exceeds 25%

for all partitions except one, for which the difference between voting and cash flow percentages is nonetheless a material 13.4% (53.0% votes versus 39.6% cash flows for the subsample with both classes publicly traded).

Managerial ownership of voting rights is measured in table 3 as a percentage of the total number of outstanding votes, i.e., as a percentage of all votes that could be cast in a given election. As an empirical matter, a substantial number of eligible votes are not cast in board elections, even when board seats are contested and thus both incumbents and dissidents expend considerable resources to solicit stockholder votes. For example, in the Dodd and Warner (1983, fn. 9) sample, an average of 15.5% of the eligible votes were not cast in proxy fights over board seats. This empirical regularity suggests that the effective voting percentage controlled by managers is greater than is indicated by the figures in table 3.

Managers’ portfolio tilt toward votes characterizes not only the average case (as documented in tables 2 and 3) but is also representative of almost every firm in the sample. Panel A of table 4 reports the frequency distribution of the

H. DeAngelo and L. DeAngelo, Munagerrui owmwhlp of wlrrrg r1ghr.s

Table 3

47

Percentage of voting rights versus implied percentage of cash tlow rights held by cnrpora~c ohicera (45 firms with dual classes of common stock).”

Shares of au~erior voting stock Othcers’

outstandmg as a Otlicers’ total implied percentage percentage of all voting rights of total

Number of common shares in board of common stock firms outstanding director clcctionah cash How5c

(1) (2) (3) (4)

A. Purlirroned by [vpe of uorrng orrongemen~

1. Voting-non-voting Mean (Median)

2. Pooled voting Mean (Median)

3. Class voting Mean (Median)

B. Pomrioned hv rruhng stums

1. Both classes publicly traded Mean (Median)

2. One class publicly traded Mean (Median)

C. Full sample Mean (Median)

21 24.5% (19.4%)

9 12.4 (10.5)

15 21.3

(14 8)

15 35.8 (31.5)

30 16.6 (10.8)

45 23.0 (170)

56.3% (60 29)

3Y.6 (38.X)

61 9 (67.3)

53 6 (53.0)

55 5 (5X 6)

54.x (56.9)

30.X% (31.1%)

174 (13 4)

29.2

(29 1)

38.4 (39 6)

22.2 (22.2)

27.6 (24.0)

aThe otlicer ownership data were calculated according to the algorithm described tn section 3 and thus include the holdings of corporate officers and their famtlies. These data are based on mformatton reported by the firm in a proxy statement or 10-K. The ownerahtp source documents are approxl- mately evenly split between 1981 and 1982. See footnote 6 for detuls.

bFor firms with class voting structures, this figure represents management’s ownership of the security with the right to elect a maJority of the board of directors.

‘For each firm, officers’ implied percentage interest m common stock cash Howa IS calculated as the weighted average of theu holdings m the superior and inferior voting stock Offtcer holdings are based on the allocation of voting rights (see the algorithm described in section 3) The weight apphed to each class ownership percentage ts the ratio of the number of shares outstandmg of that class to the total number of all common shares outstanding [see column (2) above]

difference between voting and implied cash flow interests held by corporate officers and their families. Managers’ voting rights percentage exceeds their cash flow interest in 41 of 45 firms and, in most cases, the difference is substantial. Of the remaining four firms, a non-officer group holds majority control in three cases, and this majority block effectively converts managers’


holdings of the nominally superior voting stock into holdings of non-voting stock for board elections. (The general principle is that, as long as majority control remains consolidated in a single block, the effective status of all remaining shares - whether nominally labelled voting or non-voting - is that

of non-voting stock in board elections.) Panel B of table 4 reports the frequency distribution of combinations of

voting and cash flow rights. In this format, the data again reveal a strong (almost unanimous) tendency for managers’ voting rights ownership to exceed their interest in common stock cash flows. Panel B also indicates that, for 27 of the 45 sample firms, corporate officers and their families hold sufficient voting rights to elect the board of directors or a majority thereof, depending on the

Table 4

Relationship between officers’ percentage holdings of voting rights and their implied interest in total common stock cash flows (full sample of 45 firms with dual classes of common stock).a

Difference between percent voting rights in board elections and percent of common stock cash flow~~,~

Panel A Number of firms with

difference in specified interval

-8.7<DIFF< 0 4 0s DIFF< 10 10

10 2 DIFF < 20 5 20 5 DIFF < 30 6 30 5 DIFF< 40 8 40 s DIFF< 50 5 50 5 DIFF< 76.1 7

Panel B

Number of firms in which officers’ holdings of voting and cash flow rights fall in specified intervals

Implied percentage holdings of total common stock

Percentage holdings of voting rights in board electionC

of cash flows o-9.9 10-19.9 20-29.9 30-39.9 40-49.9 50.0 +

o-9.9 5 2 2 0 1 2 10-19.9 0 0 0 3 2 3 20-29.9 0 1 0 0 0 5 30-39.9 0 0 0 0 1 7 40-49.9 0 0 0 0 1 2

50.0 + 0 0 0 0 0 8

“The officer ownership data were calculated according to the algorithm described in section 3 and thus include the holdings of corporate officers and their families. These data are based on information reported by the firm in a proxy statement or 10-K. The ownership source documents are approximately evenly split between 1981 and 1982. See footnote 6 for details.

bThe implied percentage of total common stock cash flows is calculated as the weighted average of officer holdings in the superior and inferior voting stock. The weight applied to each class is the ratio of the number of shares outstanding of that class to the total‘number of all common shares outstanding. The percentage holding in each class is based on the allocation of voting rights (see section 3).

‘For firms with class voting structures, the voting rights figure represents management’s ownership of the security with the right to elect a majority of the board of directors.

H. DeAngelo and L. DeAngelo, Managerial ownership of voting rights 49

specific voting rules. In only ten sample firms does the management group hold less than 30% of the votes and, as the appendix documents, majority control is held by non-officer directors in five of these cases.

4.3. Vote ownership under alternative definitions of the management group

The same qualitative picture of managerial voting control emerges under more broad and more narrow definitions of the relevant management coalition. For example, when managerial stock ownership is defined more broadly to include votes held by non-officer directors, the number of firms classified as majority controlled by management increases from 27 to 34 (out of 45). Of these seven additional firms, five are majority controlled by a group with significant board representation, but without principal employment as corporate officers. (In the appendix, see the entries for Alabama By-Products Corporation, American Petrofina, Inc., Pinkerton’s, Inc., Stanhome, Inc., and Zenith Laboratories, Inc.) In the other two firms, officers hold more than 40% of the votes and, once the holdings of outside directors are included in the group, the firm’s classification changes to majority controlled by management. (In the appendix, see the entries for Colonial Life & Accident Insurance

Company and Tasty Baking Company.) Regardless of whether one measures the holdings of officers alone or of

officers and directors combined, the data indicate a strong tendency for voting rights to be held by management. On the other hand, since the ownership statistics represent group holdings and since disagreements within the group are an evident possibility, one might question the coalitional stability of the management group. One way to evaluate the strength of a coalition is to measure the size of the largest voting block held by a single entity or cartelized through explicit contract such as a voting trust. The assumption underlying this more narrow measure of management ownership is that the greater the percentage of votes consolidated into a single block, the less likely that the management coalition will break.

The data indicate that, of the 27 firms classified as majority controlled by management, majority control is held by one person or one legal entity in 16 cases. In an additional six and three cases, the largest management block represents a voting interest of 40-49.9% and 30-39.9%, respectively. Moreover, in three of these cases, the largest block holding represents a 49% + voting interest and a reasonable case could be made for treating these three firms as controlled by one party. For example, the President of Plymouth Rubber Company, Inc. has sole voting power over 49.9% of the voting stock and shares voting power over an additional 2.1% with two other officers of the firm. We have conservatively classified only the 49.9% interest as the largest management block. The other two firms with 49% + block ownership would be classified as majority controlled if the shares held by only one additional family member were included in the management block. In only two of the 27

50 H. DeAngelo and L. DeAngelo. Managenal ownershrp of voting rights

firms classified as majority controlled by management does the largest single block represent less than a 30% voting interest.

The largest single block holding is also material in many of the eighteen firms that are not classified by our algorithm as majority controlled by management. For four of these eighteen firms, majority control resides in a single block voted by individuals without principal employment as corporate officers of this firm. The largest management blocks in the remaining 14 firms

break down as follows:

Voting percentage Number of firms

o-9.9 3 10-19.9 4 20-29.9 3 30-39.9 2 40-49.9 2

4.4. Family involvement in sample jrms

OIle problem with this single block perspective is that, because it considers only explicit contracts, it understates the extent to which votes are effectively consolidated into a block. Implicit contracts, e.g., as among officers and their relatives, can also act to consolidate voting rights within a group. Perusal of the appendix reveals that ownership of many sample firms is associated with a particular family group. The strength of implicit contracts among family members is, of course, quite difficult to assess. However, it does seem clear that such contracts do not perfectly consolidate voting rights since, as the appendix indicates, explicit contracts such as voting trusts and holding companies often accompany family stock ownership in our dual class companies.

On the other hand, the role of family relationships is not limited to common stock ownership since relatives also hold top management positions in many firms. Specifically, in fifteen of the 45 sample firms, proxy disclosures reveal that two or more of the five most highly paid officers are related either by blood or marriage. In a number of cases, current family members represent the second or third generation that has played a significant management and ownership role in the corporation. For example, the Bunting family has controlled Noxell Corporation since 1917 and the descendants of the founder include the current CEO and his father, the current Chairman of the Board. These facts raise the possibility that, in some firms, exchanges among family members represent a relatively low cost means of transferring corporate control. [See Buchanan (1983) for an analysis of inter-generational exchanges among family members.]

H. DeAnngelo and L. DeAngelo, Managerrol ownership 01 cufrn,q rqhts 51

According to Levy (1983, p. 86), dual class corporations with shares traded on the Israeli stock exchange exhibit a similar pattern of family involvement. Interestingly, family involvement in publicly traded American corporations apparently extends well beyond the dual class firms we study here. For example, a recent Forbes article [Bornstein (1983)] documents significant family stock ownership in 50 publicly traded corporations. While the Forbes

sampling criteria are not fully specified in the article, only one of our 45 sample firms appears in their list of 50 firms with family stock ownership of 30% or greater. These observations suggest that the role of family involvement in public corporations is itself a topic worthy of further study.

4.5. Summary of the ownership euidenceA

Overall, the results presented in this section indicate that managers of firms

with dual classes of common stock tend to hold a substantially greater ownership interest in the class with superior voting rights. For 27 of our 45 sample firms, management’s ownership interest is sufficiently great to represent majority control of the board of directors. When the relevant management group is broadened to include non-officer directors, this number increases to 34, and it decreases to 16 when we measure managerial vote ownership by the largest single block. When we separate common stock holdings into voting and cash flow components, we observe an almost unanimous tendency for managers to hold a greater share of voting than of cash flow rights. Although management’s median common stock cash flow interest is a non-trivial 24.0%. their median voting rights ownership is approximately twice as large. Finally, family involvement through stock ownership and/or employment in managerial positions characterizes many sample firms, and such involvement has sometimes persisted for multiple generations.

5. Some issues raised by the evidence

Why do some firms issue dual classes of common stock while most public corporations have a single class structure? The ownership pattern we observe suggests that firms tend to employ dual class structures when (i) substantial managerial vote ownership yields net benefits, and yet (ii) constraints at both the personal and corporate level make it costly to arrange the corporate ownership structure so that managers can afford equal percentage investments in cash flows and votes. At the personal level, limited individual or family wealth, perhaps coupled with a desire for diversification, can lead to dual class structures and/or substitute contractual arrangements (such as voting trusts, holding companies, etc.) which enable managers to hold a significant percentage of the votes with a smaller share of common stock cash flows. At the corporate level, agency costs of senior claim financing and/or benefits fore-

52 H. DeAngelo und L. DeAngelo, Managerial ownership of rming rights

gone should the scale of investment be restricted can make it unattractive to limit the equity base so that wealth-constrained managers can afford the investment in cash flows required to maintain a substantial voting interest through a single class of common stock.

A binding personal wealth constraint also potentially underlies managers’ willingness to raise public equity capital in single class firms - i.e., to sell a minority interest to outsiders at a share price which capitalizes the expected agency costs of an ownership structure in which managers retain a substantial voting rights position [Jensen and Meckling (1976)]. In this view, dual class firms represent those public corporations in which managers value control

rights and yet majority ownership of a single class is unattractive because their personal wealth is especially small when measured relative to the scale of profitable investments available to the firm. The observation that relatively few

public corporations explicitly reduce the voting rights of some classes of common stock may indicate that relatively few are managed by individuals who both value control and face an especially binding personal wealth constraint. On the other hand, such situations may not be rare, depending on the (as-yet undocumented) incidence of contractual substitutes for dual class structures. In any event, a binding individual or family wealth constraint is quite plausible for managers of our sample firms since the median company has a market value of total equity in excess of $88 million.

This explanation for dual class structures raises the more fundamental question which applies to public corporations with either single or dual classes of common stock: what are the possible benefits to a corporate ownership structure in which incumbent managers hold a substantial voting interest? In section 2, we argued that managerial vote ownership can yield benefits when managers’ performance is costly to evaluate and/or their returns are potentially appropriable when outside stockholders can transfer control to another

management group. While our data do not allow us to assess the relative importance of these factors, they do indicate that managers of many dual class firms hold sufficient votes to reduce the likelihood that corporate control will be transferred without their cooperation. In the extreme, for the 16 sample firms in which majority control resides in a single management-held block, a change in control of the board must be negotiated with the blockholder. Similarly, for the 11 additional sample firms in which majority control rests with an incumbent management group, a hostile takeover of the board cannot be accomplished without the cooperation of at least some group members. In most other sample firms, managers own a substantial (but less than majority) voting interest, and these holdings can represent a barrier to dissident stockholders who might seek to replace the incumbent management team.

Managers of most sample firms have thus effectively contracted with outside stockholders to limit competition for their jobs. Moreover, such reduced competition is not simply an unintended or unimportant by-product of an

H. DeAngelo and L.. DeAngelo, Managerial ownership of voting rights 53

ownership structure in which managers hold a substantial common stock

interest primarily for its cash flow rights. Given the dual class structure, managers could hold the same cash flow interest indicated in tables 3 and 4 with reduced voting rights by substituting out of the superior voting stock into the inferior. This feasible, but avoided, stock ownership position would give managers the same cash flow interest and would also give outside stockholders a greater ability to monitor incumbent managers through competition from other groups. Since managers and outside stockholders have voluntarily agreed to the observed allocation of voting rights, one possible interpretation of our evidence is that limited competition to manage the firm is, on net, beneficial for

our sample companies. Another interpretation, suggested to us by some readers, is that the observed

voting rights allocation is contractually inefficient because it effectively in-

sulates managers from hostile takeover. In this view, social gains net of all costs would result if managers agreed to transfer votes to outside stockholders. We are uncomfortable with this interpretation for several reasons. First, it presumes that any benefits from contracts that reduce the probability of hostile takeover are small relative to the agency costs they engender. The relative magnitude of these costs and benefits is, however, an empirical issue and there is no a priori reason to suppose that this particular form of monitoring is the dominant factor for every public corporation in every time period.

Contractual inefficiency is especially difficult to accept as an explanation for our findings since the observed arrangements represent voluntary agreements between managers and outside stockholders. These contracting parties have incentives to internalize all costs and benefits when they initially arrange the firm’s ownership structure, and to recontract should new opportunities arise. As Jensen and Meckling (1976) argue, a well-functioning capital market will force managers to bear the wealth consequences of their expected discretion through the price at which investors will initially subscribe for shares. More- over, the contracting parties also bear opportunity costs in every period in which they forego the gains from removal of a suboptimal ownership arrangement. The median firm in our sample has had a dual class structure for some 20 years. If there are economically significant net gains from the removal of these arrangements, it is difficult to understand why such gains would go unexploited for so long.

If dual class structures are inefficient organizational forms, one would expect their importance to decline over time as their deficiencies become more apparent. While conclusive evidence on this issue is difficult to obtain, there is no obvious sign that dual class arrangements are dying out. On the contrary, the New York Stock Exchange has recently appointed a special committee to study whether it should drop its current rule against listing firms that have classes of common stock with different voting rights. According to The Wall Street Journal, the NYSE policy review closely follows the announcements of

54 H. DeAngelo and L. De-Angelo. Managerial ownership 01 voting rights

plans to adopt dual class structures by several currently-listed firms (see ‘Big Board Begins Review of Limits on Listed Firms’, July 12, 1984). The same article reports that, of the 900-plus firms listed on the American Stock Exchange, 51 currently have two classes of common stock outstanding. To obtain further evidence along these lines, we repeated our sampling procedure for the years 1960 and 1970 and found 50 and 47 firms that, based solely on Moody’s description of common stock and not screened by examination of the firm’s charter, had dual class structures of the variety included in our 1980 sample of 45 firms, which was so screened. Thus, we find no evidence of a material decline over the past two decades in the number of firms with dual class structures of the variety we examine. (There is, however, some indication of a decline in the number of firms with other types of dual class structures - see section 6.)

Public corporations in which managers are protected from hostile takeover by a substantial voting interest must, of course, employ substitute disciplinary mechanisms if they are to raise equity capital at attractive terms. One possibility is that the family involvement we observe in many dual class firms serves to monitor managers who are themselves family members. Evidence that families sometimes discipline managers is provided by one sample firm in which family

members who controlled 44% of the votes conducted a ‘one-day proxy fight’ and replaced one relative with another as Chairman of the Board (see the entry for Tasty Baking Company in the appendix). Along these lines, Fama and Jensen (1983, p. 306) argue that family interactions - and the threat of social sanctions as a response to managerial self-dealing - provide managers with disincentives to trade off stockholder welfare for their own. The incentive for family monitoring is ultimately traceable to explicit and implicit contracts that tie family welfare to company profitability, through the quasi-rents relatives earn from employment at a family-controlled firm and/or through family ownership of common stock cash flows.

When managers themselves hold an interest in common stock cash flows, they bear direct wealth consequences of their discretion. Thus, cash flow ownership serves to discipline managers’ behavior by tying their welfare to that of outside stockholders. Such ownership gives managers increased incentives to take into account the effect of their decisions not only on the cash flows generated during their employment, but also on the value of their ownership position at completion of their tenure with the firm. In other words, managerial behavior is governed by the opportunity losses they bear should their decisions reduce the value of their holdings to potential purchasers. In short, the threat of hostile takeover is not the only means by which the control market governs managerial behavior. Rather, incumbents’ behavior is also disciplined by the prospect of a negotiated acquisition at terms which capitalize the expected cash flow stream generated by their prior decisions.

While our evidence indicates that managers of dual class firms value voting rights per se, the data also suggest that managerial ownership of common stock

H. DeAngelo and L. DeAngelo. Munugerrol ownershrp of ootrng rrghls 55

cash flows plays an important role in these companies. If control maintenance

were the sole objective of these managers, they should hold a majority of the voting rights with a trivial (in the extreme, zero) interest in common stock cash flows. However, managers of our sample firms hold a median 24.0% common stock cash flow interest which, while roughly half the median 56.9% voting interest, nonetheless represents ownership of a substantial share of company profits. This ownership stake is also substantial in absolute terms since, as noted earlier, the median sample firm has a total equity value in excess of $88

million. The observed mix of superior and inferior voting stock held by managers of

dual class firms provides further evidence that these managers are not simply concerned with maintaining control of the board. If board representation alone mattered, managers of firms with voting-non-voting and pooled voting struc-

tures would hold only the superior voting stock whenever their holdings represent less than a majority of the total voting rights. Similarly, managers of firms with class voting structures would hold no more than 50.1% of the superior voting stock when additional board votes are available in the other class, since additional holdings of superior voting shares effectively carry no vote in board elections. Managerial common stock holdings are tilted in the

direction predicted, but table 4 and the appendix reveal that the tilt is not as extreme as it would be if control maintenance were the only consideration to managers of these dual class firms.

Several other factors may also influence the specific quantities of superior and inferior voting stock held by managers of dual class firms. First, managers may hold stock that carries a reduced vote in board elections to improve their legal standing if challenged by minority stockholders on conflict-of-interest grounds. Second, because the inferior voting stock is the more widely held and, in 30 cases, is the only publicly traded stock, managers may hold some inferior voting shares for their greater marketability. Third, managers as a group may hold more superior voting stock than would otherwise be optimal as a hedge against the possibility that the management coalition could break. Finally, managers may hold stock that carries a reduced vote in board elections because

such shares carry voting rights in other major corporate transactions such as mergers and asset sales. While these other factors may affect managers’ share ownership decisions, their possible influence leaves unaltered our inference that managers of dual class companies hold common stock not only for the cash flow rights it confers, but also because they desire a substantial voting rights position in these firms.

6. Control premiums in selected acquisitions of dual class firms

How does one reconcile our evidence that voting rights are especially valuable in dual class firms with Lease, McConnell, and Mikkelson’s (1983) finding that shares of the superior voting class command only a small nremium


in the open market? The apparent answer, also suggested by Lease et al. (1984), is that the presence of a consolidated voting block in these firms renders open market stock prices a poor proxy for the value of a control position. Since open market share prices reflect the marginal value of a vote, the open market price spread between superior and inferior voting shares is unlikely to capture the control value of a substantial block of superior voting stock. For example, in the extreme case where a majority of the superior voting class is certain to be owned forever by a single blockholder, the remaining superior voting shares are effectively perfect substitutes for non-voting stock and should be priced accordingly in -the capital market. The substantial concentration of voting rights in dual class firms suggests that the marginal value of a board vote revealed by open market trades among dispersed stockholders is unlikely to reveal the full value of control rights in these companies. lo

To assess the value of a control position per se is a difficult empirical task. In the remainder of this section we undertake a much more modest endeavor, namely to assess the extent to which acquisitions of dual class firms provided for differential compensation to stockholders of the superior voting class. The difference in compensation paid to holders of the superior and inferior voting stock provides a lower bound on the value of a control position, but is unlikely to reflect the full magnitude of such value. Minority stockholders can hold up an acquisition by legally challenging differential payment for a controlling share block. Controlling stockholders therefore have incentives to structure the transaction so that explicit per share compensation is equal across the two classes and to take payment for control rights through other forms of compensation that are difficult to observe and value. For example, controlling stockholders could receive long-term employment or consulting contracts at greater than competitive wages or the right to purchase a division at a price below its market value. Given that side payments are an imperfect mechanism for the exchange of control rights, minority stockholders’ hold up potential should enable them to capture some portion of any payment for control rights per se in their acquisition compensation. For these reasons, the difference in

explicit compensation paid to controlling and minority stockholders is likely to understate the value of a control position.

Using the source documents described in section 3, we compiled samples of 144 firms with dual classes of common stock outstanding in 1960 and 106 firms

“Since open market prices reflect the expected marginal value of a vote, the actual ownership concentration may help explain the anomaly documented by Lease et al. (1983) that, on average, American Maize-Products’ superior voting stock has sold at a discount relative to the inferior voting stock. Managerial holdings in American Maize-Products represent 58.1% of the superior voting class and 43.8% of the inferior voting class (which is entitled to elect a minority of the board in a separate election). Holding these managerial positions fixed, the marginal value of a vote in the superior voting class is evidently less than the marginal value of a vote in the inferior voting class.


with dual classes outstanding in 1970. In many cases, a firm appeared in one sample, but not the next, because it had a dual class structure which provided for a pre-specified schedule for conversion of a class of shares with temporarily subordinated dividend rights to shares with full dividend rights. As reported in section 5, our sampling procedure revealed no material difference between 1960 and 1980 in the number of firms with identical cash flow, but different per share voting rights. Unlike the sample analyzed in sections 1-5, the 1960 and 1970 samples include companies for which the two classes have different per share cash flow rights. In other words, they were not screened for identical

cash flow rights, and thus correspond to the preliminary sample of 78 firms identified for our earlier analysis. For each firm that appeared in one sample but not the next, we searched Moody’s Manuals and the Capital Changes Reporter and found that 25 of these firms both (i) had been acquired by another firm, and (ii) had two classes of stock outstanding immediately prior to the acquisition. We identified an additional five acquired firms from the 1980

sample. For each of the 30 dual class acquisitions, we examined the Capital Changes

Reporter, the Wall Street Journal Index, and relevant articles cited therein to ascertain whether the per share payment was identical for all stockholder groups. The sample includes 12 acquisitions in which the two classes had identical cash flow rights and received the same per share compensation. While it is possible that side payments for control were made in these 12 acquisitions, no such payments were reported in our source documents. In another six acquisitions, The Wall Street Journal reported that different, difficult-to-value, forms of compensation were paid to different stockholders - e.g., the sale of a division to a manager at book value or issuance of a new security to some, but not all, stockholders of the acquired firm. While we cannot ascertain whether the compensation observed in these six cases constituted a premium for the superior voting stock, we can do so in the remaining 12 cases.

In eight of these latter 12 acquisitions, both classes received equal per share compensation although the inferior voting stock carried a nominal cash flow preference. This cash flow preference was, in many cases, complex. For example, the cash dividends on the superior voting class might be temporarily constrained to zero, or be limited to an amount less than or equal to some fraction of the cash dividends paid to the inferior voting class. These eight acquisitions entailed an extra payment to the superior voting class above that implied by its nominal cash flow rights, but the premium is difficult to estimate since it requires valuation of the cash flow preferences of the inferior voting class. Obviously, the difference in explicit per share compensation (zero) understates the magnitude of the premium actually paid for superior voting shares in these eight acquisitions.

In the remaining four acquisitions, differential payment to the superior voting stock took the form of an explicit per share premium. We next provide

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’ su

peri

or s

hare

( P

z ).

Des

crip

tion

of c

omm

on

stoc

k ~e

sc~p

tion

of t

rans

actio

n al

l sha

res

( P3 )

b

Ab

erd

een

Pet

role

um

Car

pom

tion

(Del

awar

e).

1974

/197

5 te

nder

of

fer

by A

dobe

O

il an

d G

as C

orpo

ratio

n (f

ol-

low

ed b

y 19

76 m

erge

r in

to A

dobe

).

Abe

rdee

n ha

d a

clas

s vo

ting

stru

ctur

e la

whi

ch t

he s

uper

ior

votin

g st

ock

elec

ted

a m

ajor

ity

of t

he b

oard

. Q

n a

per

shar

e ba

sis,

th

e in

feri

or

votin

g st

ock

had

a $1

div

iden

d an

d O

f0 I

jqui

datio

R p

refe

r-

ence

, af

ter

whi

ch

it sh

ared

in

all

cash

dis

t~bu

tjons

at

the

rat

e of

te

n tim

es t

he p

aym

ent

to t

he s

uper

ior

vatin

g st

ock

{per

Moo

c@‘s

).

The

su

peri

or

votin

g st

ock

was

100

% o

wne

d by

a c

ompa

ny

whi

ch

itsel

f w

as 1

05%

ow

ned

by

the

fath

er

of

Abe

rdee

n’s

Pres

iden

t. A

dobe

m

ade

a ca

sh

tend

er o

ffer

at

$8.2

5 pe

r su

peri

or

votin

g sh

are

and

$4.5

0 pe

r in

feri

or

votin

g sh

are

(plu

s ad

ditio

nal

paym

ent

to

supe

rior

vo

ting

stoc

kboi

der

in f

orm

of

assu

med

lia

bilit

y).

Ado

be

snec

essf

ully

ac

quir

ed

cont

rol

by b

eatin

g a

com

petin

g bi

d by

Sab

ine

Roy

airy

C

orpo

ratio

n at

$7.

50 p

er s

uper

ior

votin

g sh

are

and

$4 p

er

Enf

erio

r vo

ting

shar

e (p

Ius

sam

e si

de p

aym

ent)

. T

hese

off

er p

rice

s ha

ve

nor

been

adj

uste

d fo

r th

e su

peri

or

votin

g st

oek’

s on

e-fo

r-te

n ca

sh

flow

sub

ordi

natio

n.

Bot

h of

fers

for

th

e in

feri

or

votin

g st

ock

wer

e co

nditi

oned

up

on p

urch

ase

of a

ll of

the

sup

erio

r vo

ting

stoc

k.

(In

I970

an

d 19

71,

cont

rol

of A

berd

een

twic

e ch

ange

d ha

nds

at

undi

sclo

sed

term

s.

In 1

972,

Abe

rdee

n an

noun

ced

ifs

inte

ntio

n to

co

mpl

ete

a ne

gotia

ted

repu

rcha

se

of a

ll of

its

sup

erio

r vo

ting

stoc

k.

The

neg

otia

ted

repu

rcha

se

was

cha

lleng

ed b

y m

inor

ity s

tock

hold

er

suit

and

subs

eque

ntly

ab

ando

ned

by t

he f

irm

.)

&ar

turr

onul

Q

id L

ine

Insu

ranc

e C

ampr

tn,v

(Ark

ansa

s).

Four

tr

usts

fo

r th

e be

nefi

t of

th

e da

ught

ers

of

the

late

Nat

iona

l P,

= 1

40.2

%

Fres

iden

t ow

ned

67.1

% o

f th

e vo

ting

stoc

k.

Tw

o of

th

e fo

ur

1981

mer

ger

into

Enn

ia,

NV

. da

ught

ers

wer

e m

arri

ed

to c

ompa

ny

oRic

ers

and

ant-

was

her

s&

a P

r =

58.4

%

dire

ctor

, A

ll fo

ur

trus

ts w

ere

supe

rvis

ed b

y th

e sa

me

trus

tees

{tw

o P

3 =

13.7

%

Nat

ion&

had

a y

ut~n

~-n~

.~~t

i~~

stru

ctur

e in

whi

ch a

ll sh

ares

had

co

mpa

ny

dir

ecto

rs a

nd a

n of

fice

r-di

rect

or).

fn t

he i

nitia

l pr

opos

al.

iden

tical

ca

sh R

ow r

ight

s w

ith t

he s

ole

exce

ptio

n of

com

pens

atio

n m

erge

r co

mpe

nsat

ion

was

stip

ulat

ed

as $

&I

per

votin

g sh

are

and

in a

mer

ger

or c

onso

lidat

ion

(per

mer

ger

prox

y).

$267

5 pe

r no

n-vo

ting

skar

e.

The

in

itial

co

ntro

l pr

emiu

m

was

ch

alle

nged

by

min

ority

st

ockh

olde

r su

it an

d th

is l

itiga

tion

(set

tled

out

of c

ourt

) le

d to

ulti

mat

e pr

ices

of

$47.

80 p

er v

otin

g sh

are

and

$2X

.23

per

non-

votin

g sh

are.

T

he

settl

emen

t re

duce

d th

e co

m-

pens

atio

n di

ffer

entia

l be

twee

n th

e tw

o cl

asse

s bu

t le

ft

the

tota

l ac

quis

ition

pr

ocee

ds

virt

ually

un

chan

ged

Alth

ough

no

t re

quir

ed

by c

hart

er,

the

mer

ger

was

mad

e co

nditi

onal

up

on a

ppro

val

of t

he

non-

votin

g cl

ass

(and

was

app

rove

d).

-._-

.---

_.__

1975

m

erge

r tn

to

Man

ufac

ture

rs

Han

over

C

orpo

rano

n

Rttt

er

had

a cl

ass

votin

g w

.ctu

re

in

whi

ch

the

supe

rior

vo

ting

stoc

k w

as

entit

led

to e

lect

a

maJ

ority

of

th

e bo

ard.

A

ll sh

ares

w

ere

to

hc

trea

ted

equa

lly

m

term

s of

di

vide

nd

and

liqui

datio

n pa

y-

men

ts

(per

m

erge

r pr

oxy)

.

1060

m

crgc

r in

to

Rey

nold

s M

etal

s C

ornp

an!

U.S

. Fo

il ha

d a

votin

g-no

n-vo

ting

stru

ctur

e in

w

htch

th

e tu

o cl

asse

s ha

d Id

entic

al

cash

fl

ow

rtgh

ts

(per

M

OO

&‘\

)

At

the

time

of

the

mer

ger.

.all

of

the

supe

rior

vo

ting

righ

ts

stoc

k w

as

held

in

a v

otin

g tr

ust

of

whi

ch

Ritt

er’s

C

hair

man

an

d hi

s w

ife

wer

e tw

o of

th

e th

ree

trus

tees

(a

nd

sole

be

nefi

ciar

ies)

. T

he

mer

ger

com

pens

atio

n co

nsis

ted

of

one

shar

e of

M

HC

co

mm

on

for

1.37

5 R

ittcr

su

peri

or

votin

g sh

ares

or

2.

75

Ritt

er

infe

rior

vo

ting

shar

es.

In

1969

. R

ittet

st

ockh

oIde

rs

had

appr

oved

a

plan

of

re~

lass

i~ca

tion

whi

ch

prov

ided

fo

r th

e fu

ture

co

nver

sion

(b

y 19

79)

to a

sin

gle

clas

s of

co

mm

on

with

th

e sh

ares

he

ld

by

the

Cha

irm

an

and

his

wif

e to

he

co

nver

ted

at

twic

e th

e ra

te

of

the

infe

rior

vo

ting

stoc

k.

The

rc

claa

srhc

atio

n pl

an

also

pr

ovid

ed

for

diff

eren

tial

paym

ent

to

min

ority

st

ockh

olde

rs

~rrh

tn

the

clas

s of

su

peri

or

votm

g st

ock

(who

re

ceiv

ed

less

th

an

the

two-

for-

one

com

pens

atio

n w

hich

w

ould

ac

crue

to

th

e C

hair

man

an

d hi

s w

ife

whe

n th

eir

shar

es

wer

e co

nver

ted)

U

nder

th

e re

clas

sifi

catio

n pl

an,

min

ority

ho

lder

s su

r-

rend

ered

th

eir

supe

rror

vo

tmg

shar

es

prio

r to

th

e M

HC

m

erge

r.

P,

= 10

0.0%

Pz

=

50.0

%

P, =

2.

4%

Srnc

e 19

24.

Rey

nold

s fa

mily

- in

tere

sts

cont

rolle

d 10

0%

of

U.S

. Fo

tl’s

vottn

g st

ock

Sinc

e 19

28.

U.S

. Fo

il w

as

a ho

ldin

g co

mpa

ny

for

Rey

nold

s M

etal

s C

ompa

ny

and,

in

ef

fect

, w

as

part

of

a

com

plex

st

ock

pyra

mrd

en

ablin

g th

e R

eyno

lds

fam

ily

to

cont

rol

Rey

nold

s M

etal

s.

In

1959

, a

U.S

. Fo

il m

inor

ity

stoc

khol

der

file

d ku

it to

re

quir

e liq

uidd

tion

of

U.S

. Fo

il fo

r th

at

reas

on.

The

re

sult

of

the

lrttg

atio

n w

as

slm

ulta

ne~u

s (i

) re

clas

sifi

catio

n of

U

.S.

Foil

in

whi

ch

each

ol

d vo

ting

shar

e re

ceiv

ed

rhre

e sh

ares

of

ne

w

Foil

com

mon

an

d ea

ch

old

non-

votin

g sh

are

rece

ived

on

e sh

are

of

new

Fo

il co

mm

on

and

(ii) ea

ch n

ew s

har

e of

F

&t

was

exc

hang

ed

for

0.85

sh

are

of

Rey

nold

s M

etal

s co

mm

on,

The

m

erge

r ag

reem

ent

was

co

nditi

oned

up

on

com

plet

ion

of

the

recl

assi

fica

tion

and

upon

re

ceip

t of

cou

rt

appr

oval

of

the

ent

ire

tran

sact

ion.

R

eyno

lds

fam

ily

inte

rest

s em

erge

d fr

om

the

tran

sact

ion

with

ap

pro~

mat

ely

a 17

%

inte

rest

in

R

eyno

lds

Met

als

Com

pany

.

- P

, =

200

.0%

Pz

=

66.1

%

Pj =

11

.5%

‘Inf

orm

atio

n in

the

ta

ble

was

ex

trac

ted

from

m

erge

r pr

oxy

stat

emen

ts

(fia

tiona

l O

ld

Lin

e an

d R

itter

),

agre

emen

t of

m

erge

r (U

.S.

Foil)

, te

nder

of

fer

docu

men

ts

(Abe

rdee

n),

the

Cap

ital

Cha

nges

Rep

orre

r,

Moo

dy’s

M

anua

ls,

and

vari

ous

Wal

l St

reer

Jou

rnal

ar

ticle

s.

bLet

K

SUP

and

VIN

F re

spec

tivel

y re

pres

ent

the

per

shar

e co

mpe

nsat

ion

to

the

supe

rior

an

d in

feri

or

votin

g st

ock

and

let

NSU

P

and

NIN

F re

pres

ent

the

num

ber

of

shar

es

outs

tand

ing

in

each

cl

ass.

T

he

.thre

e pr

emiu

m

mea

sure

s ar

e de

fine

d as

th

e pe

rcen

tage

eq

uiva

lent

s of

Pi

= (

KS&

P -

V~

~F)

/V~

~F,

P

2 =

f V

SUP

-

V~

~F)

/VS~

P,

and

Ps =

f V

SUP

-

VfN

F)

NSU

P~

~V

S~P

~

NSU

P)

-f- U

HF{

IV

INF)

). Fo

r A

berd

een

Petr

oleu

m,

alI

thre

e pr

e~um

s ar

e un

ders

tate

d in

sofa

r as

th

e pe

r sh

are

figu

res

have

no

r be

en

adju

sted

fo

r th

e su

peri

or

votin

g st

ock’

s no

min

al

one-

for-

ten

cash

fl

ow

subo

rdin

atio

n.

60 H. DeAngelo and L. DeAngelo. Managerial ownership o/voting rights

details of these four acquisitions, a discussion which is subject to an important caveat. Because these acquisitions were not randomly selected, they should not be taken as representative of control premiums across all corporate acquisitions or even across all acquisitions of dual class firms. Rather, we view these four acquisitions simply as case. studies which document payment for control

rights per se in some acquisitions of publicly traded corporations. Table 5 summarizes the relevant details of these four control exchanges and

reports three measures of the differential payment to the superior voting stock. The first measure, P,, represents the percentage by which the per share compensation to. the superior voting stock exceeded that to the inferior. This per share premium is quite large in all cases, ranging from 83.3% to 200.0%. The 83.3% figure for Aberdeen Petroleum is understated, however, because we

made no adjustment for the cash how preferences of the inferior voting stock. (The other Aberdeen premium measures are also understated for this reason - see the first column in table 5.) If we adjust only for the ten-to-one cash flow preference and ignore the other cash flow advantages of the inferior voting shares, the per share premium to Aberdeen’s superior voting shares increases to 1733.3%, and the range of P, values for the four acquisitions becomes 100% to 1733.3%.

These premiums are much larger than the approximately 5% average figure reported by Lease et al. (1983) who calculated control premiums for dual class companies using the same P, formula, but based on open market prices for the superior and inferior voting shares. Given rational expectations pricing, open market share values will be discounted to reflect the joint probability that both (i) an acquisition will occur and (ii) the transaction terms will provide greater per share compensation for public stockholders of the superior voting class. Of the 30 dual class acquisitions we examined, we found no case in which an explicit premium was paid for superior voting shares that traded in a public market. Thus, one possible explanation for the small difference in open market prices is that the joint probability of (i) and (ii) is low. If this explanation is correct, then control of these companies is more valuable than indicated by the

5% open market price difference because these prices have been discounted to reflect the low probability that a control transfer will occur at terms which provide differential compensation for publicly held superior voting stock.

For our four case studies, table 5 reports two other measures of the acquisition premiums paid for superior voting shares. The P2 measure represents the differential payment for superior voting stock as a percentage of the total compensation paid to that class. By this measure, 45.5% to 66.7% of the compensation received by holders of the superior voting class constituted payment for the associated voting rights advantage. The last measure, P3, represents the differential payment to the superior voting stock as a percentage of the total explicit compensation paid to both classes. This measure indicates that between 2.4% and 13.7% of the total acquisition proceeds represented

H. DeAngelo and L. DeAngelo, Managerial ownership of uotmg rights 61

payment for the control rights of the superior voting stock. Of all the control premium measures reported in this section, only the 2.4% figure seems to be of questionable economic significance. In any case, all premium measures provide a lower bound on the value of a control position in these firms because they do not include any side payments to controlling stockholders and because the threat of litigation can enable minority stockholders to capture some portion of the payment for control (see table 5 for examples of such litigation).

In summary, these four case studies indicate that controlling stockholders have sometimes received payments above those made to minority stockholders in acquisitions of dual class firms. We want to re-emphasize that the control premium measures reported here should not be extrapolated to the population of corporate control transactions. Rather, we interpret these premiums as merely suggestive - i.e., as indicating that, in some companies, a control position itself can be of economically significant value. These case studies also serve to highlight an interesting research question: are control rights per se of

economically significant value in a material number of other publicly traded corporations?

7. Summary and conclusions

The evidence presented in this paper indicates that, in firms with dual classes of common stock, managerial vote ownership is an important element of the corporate ownership structure. In almost all of our 45 sample firms, corporate officers and their families hold a larger percentage of the superior voting stock than of the inferior voting stock. These common stock holdings represent a median 56.9% of corporate voting rights, which is roughly twice the size of the median 24.0% interest in common stock cash flows. Twenty-seven of the 45 sample firms are majority controlled by the management group and, for 16 of these firms, majority control of the board explicitly resides in a single voting block. We also find evidence that family involvement in these firms extends beyond common stock ownership insofar as, in 15 companies, two or more

relatives are among the five most highly paid corporate officers. Finally, we document four case studies in which controlling stockholders of dual class firms received substantial acquisition premiums for their superior voting stock.

The observed allocation of ownership rights suggests that dual class firms may best be viewed as an intermediate organizational form which fits some- where between the polar cases of the dispersed-ownership public corporation and the closely-held firm. In dispersed-ownership corporations, each investor - manager and outside equityholder alike - holds a small fraction of both common stock cash flow and voting rights, whereas in closely-held firms, incumbent managers hold essentially all cash flow and voting rights. In the dual class firms we study, managers typically hold a majority voting interest while outside suppliers of capital hold a majority interest in common stock

J.F.E..-C

62 H. DeAngelo and L. DeAngelo. Managerial ownership of voting rights

cash flows. These intermediate organizational structures are most likely to be employed in situations in which managerial vote ownership yields benefits

(e.g., by encouraging managerial investment in firm-specific human capital) and yet binding personal wealth constraints faced by individual or family managers imply that attractive investments can be undertaken only if substantial amounts of equity capital are raised from public stockholders.

The empirical importance of these intermediate organizational forms is an unresolved issue, although it potentially extends beyond the dual class companies we study. For example, given binding personal wealth constraints, managers of firms with a single class of common stock can effect ownership arrangements similar to a dual class structure through contractual substitutes such as voting trusts, holding companies, etc. Additionally, several recent studies report evidence which suggests that managerial common stock owner-

ship in some publicly traded corporations may be greater than commonly thought. For example, Bitter (1981, p. 35) finds that insiders retain 72% of the equity following the typical initial public offering. DeAngelo, DeAngelo and Rice (1984) report management ownership of 50.9% of the median NYSE/AMEX firm seeking to go private. Demsetz (1983) documents substantial managerial stock ownership for a small sample of Fortune 500 firms. Finally, a recent study by the SEC (1984) examines stock ownership in nearly 6,000 publicly traded companies and finds that, in approximately 15% of these firms, one officer alone holds at least 10% of the outstanding common stock. While these data do not establish that managerial vote ownership is an important consideration for a significant number of public companies, they do raise the possibility. The importance of such ownership across the spectrum of public corporations, together with the extent of family involvement in this population, are interesting questions raised, but not resolved, here.

Appendix

This appendix reports managerial ownership percentages in both classes of common stock and other relevant details for each individual firm in the sample. The first column of each panel lists each individual firm, followed by the state and date of incorporation. The second and third columns contain, respectively, the percentage ownership by officers and directors (as reported to the SEC) and the percentage ownership for officers alone (computed using the algorithm described in section 3), for both classes of common stock. For the dual class firms with pooled voting arrangements (panel B), we also report the combined voting power controlled by officers. For the dual class firms with class voting arrangements (panel C), we also report the portion of total board members elected by the superior voting class. Finally, a brief description of the ownership arrangements follows each individual firm entry.

H. De-Angelo und 1.. DeAngeio, Munugerrul ownershIp of voting r1ght.v 63

Panel A: Management ownership percentages for 21 firms with voting and non-voting common stock

Firm (state and date of incorporation)

Reported ownership by ot?icers and

directors

Voting Non-voting stock stock

Recomputed ownership for officers alone


1. Aluhumu Bv-Products Corporutron (Delaware in 1920)

0.2% 0.8% 0.0% 0.1%

The largest single stockholder, Drummond Company, controls 65.7% of the voting stock through a wholly-owned subsidiary. Four of the seven directors are executive officers of Drummond.

2. Allen Orgun Compunv (Pennsylvania in 1945)

69.8% 34.3% 71.1% 35.5%

The founder and current President owns 63.6% of the voting stock.

3. Brown Formun Distillers Corporution

(Delaware in 1933, Kentucky in 1901) 62.5% 29.1% 62.4% 29.1%

The Brown family, through individual holdings and trusts, owns at least 62.4% of the voting stock. (This number is understated because it applies only to Brown family members who are also officers and/or directors.) The CEO, a Brown family member, controls 31.9% of the voting stock.

4. Bull & Beur Group, Inc.

(New York in 1959) 100.0% 43.2% 100.0% 38.5%

The CEO, one of two co-founders, owns 100% of the voting stock.

5. Colonral Life & Accident

Insurunce Company (South Carolina in 1939)

86.0% 16.0% 48.6% 3.9%

While 48.6% of the voting stock is held by current officers, an additional 34.3% is voted by a director who is the son of a recently deceased co-founder. The CEO controls 48.5% of the voting stock.

6. Adolph Coors Company

(Colorado in 1913) 100.0% 35.0% 100.0% 39.3%

A Coors family trust holds 100% of the voting stock. The CEO, the chief operating officer, and two senior vice presidents (all directors) are Coors family members.

7. DeKulh Ag Reseurch ( Inc.

(Delaware in 1938, Illinois in 1917) 34.7% 5.5% 44.6% 5.7%

The Roberts family and Roberts family trusts control 43.1% of the voting stock. The Chairman of the Board/CEO and the Vice Chairman are Roberts family members.

8. Equltcrhle of Iowu Companies (Iowa in 1867)

85.3% 77.2% 85.0% 77.0%

The Hubbell estate trust (established in 1903 by the principal founder), a voting trust, and individual family members together control 84.2% of the voting stock. The Hubbell trust alone owns 68.7% of each class of stock. This trust terminates in 1983. and the beneficiaries have agreed to deposit 51.2% of the voting stock in the voting trust.

9. Federuted Investors. Inc. 59.0% 36.0% 100.0% 31.0% (Pennsylvania in 1957)

The voting stock is 84% owned by the CEO and members of his family. The company merged with Aetna in 1982.

64 H. DeAngelo und L. DeAngelo, Manageriul ownership of voting rights

Panel A: (continued)


Reported ownership by officers and

directors




10. Finance Company o/America (Baltimore) (Delaware in 1921, Maryland in 1917)

93.0% 82.0% 92.6% 82.0%

The President owns 90.1% of the voting stock.

11. Genesee’ Brewing Company, Inc. (New York in 1932)

61.2% 13.7% 60.2% 12.9%

The Wehle family controls 59.2% of the voting stock. The CEO, a Wehle family member, controls 49% of the voting stock.

12. Gilbert Associates. Inc. (Delaware in 1942)

14.0% 2.0% 14.0% 0.2%

Holders of voting stock must be active employees of the company or of 100% owned subsidiaries.

13. Home Beneficial Corporation (Virginia in 1970)

32.6% 20.4 71.4% 15.9%

A voting trust holds 67.9% of the voting stock. Four of the five voting trustees are members of the Richardson/Wilt&ire family and officers and directors of the corporation.

14. McCormick & Company, Inc. (Maryland in 1915)

12.9% 2.2% 27.2% 2.2%

The employee profit sharing plan holds 14.3% of the voting stock. The right to vote this stock is held entirely by officers and directors.

15. Multnomah Kennel Club 11.8% 2.1% 9.0% 0.7% (Oregon in 1933)

The company’s largest stockholder is a non-management individual who owns 21.3% of the voting

16. Noxell Corvoraiion 82.9% 10.4% 82.8% 9.2% (Maryland’in 1917)

Two members of the Bunting family, which has controlled the firm since 1917, currently control 82.8% of the voting stock. These two individuals are the CEO and the Chairman of the Board (his father).

17. Frank Paxron Company (Delaware in 1926)

80.8% 42.9% 77.7% 42.6%

The Paxton family controls approximately 75% of the voting stock.

18. Pinkerton’s, Inc. (Delaware in 1925)

100.0% 9.9% 0.0% 2.9%

Pinkerton family holdings (through trusts and a holding company) constitute 100% of the voting stock. These family holdings are classified as non-officer, since none of the family members currently holds a top management position with the company. Pinkerton’s was acquired by American Brands in 1982.


Panel A : (continued)



directors




19. Plymouth Rubber Company, Inc. (Massachusetts in 1922)

14.5% 12.5% 58.7% 50.0%

The President/Treasurer controls 49.9% of the voting stock through trusts of which he is the sole trustee. He and other officers control an additional 2.1% through joint trust holdings.

20. Rose’s Stores, Inc. 50.6% 42.6% 57.0% 44.4% (Delaware in 1927)

The Church family controls 55.5% of the voting stock through various individual holdings and a voting trust.

21. Stanhome, Inc. (Massachusetts in 1931) (formerly Stanley Home Products, Inc.)

53.8% 13.9% 19.6% 1.9%

The Beveridge family, through individual holdings, the trust under the will of the founder, and a foundation, controls 59.6% of the voting stock. The trust alone holds 47.1% of the voting stock. These holdings are allocated as non-officer because two of the three voting trustees of the trust are recently retired former officers. If the entire Beveridge family holdings were considered as officer-held, the percentage in the table would increase to 66.7% of the voting stock.

Panel B: Management ownership percentages for nine dual class firms with pooled voting arrangements



directors

Superior Inferior class class


(Combined Superior Inferior voting

class class power)

1. American Greetings Corp. (Ohio in 1944)

52.6% 6.6% 58.7% 8.0% (35.4%)

The founder is a director; his two sons are the CEO and Vice Chairman of the Board, and his son-in-law is President. A voting trust holds 26.1% of the combined voting power; the trustees are the founder and his two sons.

2. Boston Company, Inc. 23.0% 31.4% 11.1% (Massachusetts in 1964)

The company was acquired by Shearson American Express in 1981.

29.0% (17.6%)

66 H. DeAngelo and L. DeAngelo, Managerial ownership of votrng rights

Panel B: (continued)



directors



(Combined Superior Inferior voting

ClaSS class power)

3. Burns Inlernational 32.9% 10.0% 100.0% 15.9% (52.0%) Security Services, Inc.

(Delaware in 1961, New York in 1947)

Members of the Bums family, through estates, trusts, and individual holdings, control stock with a combined voting power of 50.8%. Bums was acquired by Borg Warner in 1982.

4. Ford Motor Company 27.2% 0.9% 95.9% 0.9% (38.8%) (Delaware in 1919, Michigan in 1903)

The Ford family and trusts, estates, associates, and charitable corporations for which Ford family members exercise the voting rights together own 95.9% of the superior voting stock.

5. Harvey Hubbell, Inc. 41.3% 1.4% 41.1% 1.2% (Connecticut in 1905)

36.2% of the superior voting stock is held in trust for Hubbell family members.

(36.0%)

6. Resorts Inrernational, Inc. (Delaware in 1958)

47.2% 8.2% 57.6% 5.9% (53.0%)

The Crosby family controls 52.7% of the combined voting power of the company. Family members include the Chairman of the Board/CEO, the Vice Chairman and the Vice President (both sons of the CEO), and the Corporate Secretary (son-in-law of the CEO).

7. Reynolds & Reynolds 100.0% 2.5% 100.0% Company, Inc.

(Ohio in 1889) The Grant family controls 50.2% of the combined voting power.

2.5% (50.7%)

8. Tasty Baking Company (Pennsylvania in 1914)

27.5% 9.1% 51.0% 40.6% (44.0%)

The officer ownership figures include the Baur family holdings (32.1% of the combined voting power), but exclude the Kaiser family holdings (11.5% of the combined voting power). The Baurs are descendants of one of the company founders and are related to the Kaisers through marriage. In a 1981 proxy contest, the former Chairman (a Kaiser who is married to a Baur) was forced to resign by the Baurs and was replaced by a Baur.

9. Tele-Communications, Inc. (Delaware in 1968)

35.8% 8.0% 36.9% 7.5% (29.3%)

The Chairman of the Board controls 25.5% of the combined voting power. An outside blockholder ‘with two representatives on the board and combined voting power of 12.5% has a buy/sell agreement with the Chairman. If these additional holdings were therefore classified as management-controlled, then management’s combined voting power would increase to 41.8%.

H. DeAngelo and L. DeAngelo, Managenal ownershlp of ooting rights 67

Panel C: Management ownership percentages for 15 dual class firms with class voting arrangements


directors



Recomputed Portion of

ownership for total board

officers alone members

_ elected by the superior

Superior Inferior voting class class class

1. Addison- Wesley Pubkhrng Cornpan) 70.6% 13.9% 83.6% 13.4% 6/8 (Massachusetts in 1947, New Hampshire in 1942)

Three individuals, all officers and directors who have been with the firm since it was founded, together own 80.8% of the superior voting stock. The Chairman of the Board alone owns 54.9% of the superior voting stock.

2. Amerrcan Malre-Products Compaq 58.7% 43.8% 58.1% 43.84 7/11

(Maine in 1906) The Chairman of the Board/CEO, who is the grandson of the founder, controls 56.9% of the superior voting stock.

3. Amerrcan Perrojinu, Inc. (Delaware in 1956)

0.7% 1.5% 0.7% 1.5% 5/9

Petrofina. S.A. owns 99.3% of the superior and 73.1% of the inferior voting stock through a series of other corporations.

4. Beneficral Standard Corporation (Delaware in 1967)

22.4% 18.8% 44.5% 31.2% 8/12

A voting trust with five trustees [the Chairman of the Board, the President (his son), and the three adult daughters of the Chairman] controls 35.7% of the superior voting stock.

5. A. T. Cross Cornpan, 100.0% 18.1% 100.0% 18.0% 6/9 (Rhode Island in 1916)

Through two trusts, officers of the company control 100% of the superior voting stock. Two of the voting trustees are Boss family members (brothers). the Chairman of the Board and the President of the company.

6. Crown Central Pefroleum Corporation 52.5% 45.1% 52.5% 45.1% 12/14 (Maryland in 1937, Delaware in 1923)

The Chairman of the Board/CEO, mostly through a controlled corporation, controls 51.2% of the superior voting stock.

7. Dillard Department Stores, Inc. (Delaware in 1964)

71.1% 2.0% 83.2% 1.7% 10/14

The Dillard family, through a family corporation, owns 83.2% of the superior voting stock. This family corporation is 50.1% owned by the Chairman of the Board/CEO of Dillard Department Stores. Another corporation owns 55.5% of the inferior voting stock.

68 H. DeAngelo and L. DeAngelo, Managerial ownership of voririg rights

Panel C: (continued)


Portion of

Reported ownership Recomputed total board

by officers and ownership for members directors officers alone elected by

the superior Superior Inferior Superior Inferior voting

class class class class class

8. Glenmore Disrilleries Company (Delaware in 1943, Kentucky in 1901)

56.4% 27.0% 67.3% ‘26.7% 7/10

Through a voting trust agreement and individual ownership, members of the Thompson family control 67.3% of the superior voting stock.

9. Media General, Inc. (Virginia in 1969)

58.9% 18.7% 88.8% 16.6% 6/9

The Chairman of the Board and his family control 88.8% of the superior voting stock.

10. The New York Times Company, Inc. 77.0% 34.4% 76.7% 34.2% 8/12 (New York in 1896)

The Ochs trust controls 76.6% of the superior voting stock. Two of the three trustees are Ochs family members, the Chairman of the Board and his mother.

11. Nike, Inc. 73.5% 1.7% 73.3% 1.0% 6/7 (Oregon in 1968)

The Chairman of the Board/President owns 60.9% of the superior voting stock.

12. Presidential Realty Corporation (Delaware in 1961)

45.0% 9.9% 43.4% 6.3% 8/12

The Shapiro family controls 43.4% of the superior voting stock.

13. Sikes Corporation (Florida in 1954)

100.0% 31.7% 56.9% 19.2% 5/8

The Sikes family controls 56.9% of the superior voting stock.

14. The Washington Post Company (Delaware in 1947)

80.5% 50.4% 100.0% 40.4% 5/8

The Graham family controls 100% of the superior voting stock. Katherine Graham, Chairman/CEO, votes 50.1% of the superior voting stock.

15. Zenith Laboratories, Inc. (New Jersey in 1956)

1.5% 5.1% 0.0% 0.0% 7/12

A group of firms owns 100% of the superior voting stock (subject to a voting agreement that all stock is voted as the majority rules).

The information in this appendix was compiled from corporate articles of incorporation, proxy statements, prospectuses, form 10-K’s, annual reports, personal correspondence with the firm, Moody’s Manuals, the Capital Changes Reporter, Who’s Who in Finance and Indusrty, and Dun and Bradstreet’s Reference Book of Corporate Management.

H. DeAngelo and L. DeAngelo, Managerial ownership of voting rrghts 69

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